Home Equity Line of Credit vs. Credit Card

Compare the fundamental differences between a home equity line of credit and credit card

A home equity line of credit, or HELOC, and a credit card are both revolving lines of credit. This means you can borrow from the line, make payments on what you owe and then continue to borrow from the available balance. Both HELOCs and credit cards can be used for just about whatever you want. However, there are some major differences between these borrowing options:

  • A home equity line of credit approval, as well as the interest rates and the line of credit you receive, will be based on a number of factors including your current credit score, debt-to-income ratio, loan-to-value ratio, loan amount, property type, lien position and draw at closing. You can borrow a large sum of money and continue to draw on it for about five to ten years depending on your bank's policies. During this borrowing period, you will only be required to make interest-only payments. However, at the end of the borrowing period you will have to make amortized payments, which include both interest and principal. This makes a HELOC a great option for more expensive purchases like home repairs, college education expenses, or even paying off other debt. Take note, a HELOC is secured with your home as collateral, so if you default on your payments you may risk losing your home.
  • With credit cards, your ability to qualify depends on your credit score, which is a reflection of your past credit spending and repayment, as well as your current debt to income ratio. Credit cards typically have lower credit limits than HELOCs and in most cases are used for smaller purchases. This includes store credit cards that can only be used to purchase goods at the store from which they are issued. Credit cards are available with either a fixed rate that seldom changes or a variable rate that fluctuates with the economy. Failure to make payments on a credit card can raise your interest rates, cost you penalty fees and may damage your credit score.

When should you use a HELOC instead of a credit card?

Credit cards and home equity lines of credit have unique borrowing benefits. However, larger expenses like home renovations, car loans, education and debt consolidation may be better suited to the payment structure of a HELOC.

  • HELOC payments may be tax deductible. Be sure to consult your tax advisor or the IRS website for eligibility details.

    • Unsecured lines of credit like credit cards do not offer this benefit.
  • HELOCs have interest-only payments during the borrowing, or draw, period. However, you can also choose to make payments towards the principal in order to lower your amortized payments. This can help make payments more manageable when consolidating debt.

    • Credit cards, on the other hand, may have a fixed minimum payment that is often lower than the full monthly balance. Anything that is not paid off will accrue interest each month it is not paid. You may also face late fees depending on your credit card agreement.
  • HELOCs are available with low, variable interest rates. Additionally, you may be able to choose a Capped Rate HELOC structure so the rate never rises above a set percentage. This can be helpful when using a HELOC to pay for college or consolidate car loans.

    • The fixed rates on a credit card are generally higher than the interest rates on a home equity line of credit because the credit card doesn't have any supporting collateral. Therefore, while it is useful for everyday purchases, you may not want to use a credit card to pay for college or large home renovations.

How do you apply for HELOCS and credit cards?

The application processes for credit cards and HELOCs are very different; many find it takes less time to obtain a credit card. Here's what you need to know:

  • Credit card: Credit cards may be issued by a bank, credit union or retailer and are available with variations in rates, credit line and rewards. Once you choose a credit card that works for your needs, you can typically apply online, by phone or in person. Approval, interest rates and the line of credit you receive will be based on your current credit score as well as your debt-to-income ratio. Be aware that the application process may differ slightly by company and the amount of the credit line you are applying for.
  • Home equity line of credit: With a HELOC, the bank will need to determine how much home equity you have in your house and what your loan-to-value ratio is. This will tell you how much you can afford to borrow, but remember, some financial institutions won't let you borrow more than 80% of the value of your home. You can typically apply for a HELOC online, over the phone or in person. In most cases, the bank will require a home appraisal to obtain your home's current value.

Consider a HELOC or credit card from Citizens Bank for your borrowing needs

While both credit cards and home equity lines of credit are viable borrowing options, they are often used for very different purposes. The lower rates and interest-only payment structure during the draw period for HELOCs often make them ideal funding for a home improvement loan. However, if you need a line of credit for daily purchases, you may want to consider a Citizens Bank credit card. If you think a HELOC is right for you, start the home equity line of credit application process by filling out a quick form online, and a helpful Home Loan Advisor will contact you to complete the application and walk you through next steps in the process.


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